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Tuesday, July 20, 2010

The Case for Emerging Markets

One of the best selling points for investing in emerging markets is growth potential, but like any other sector, this growth must come at a reasonable price.

Emerging market stocks are cheap these days. The MSCI Emerging Markets Index has a 12-month forward price-to-earnings ratio of 10.8x, which is 15 percent below the P/E for the MSCI World Index. As you can see on the chart below, this valuation has rarely been more attractive – it is 15 percent below the long-term average.

On top of that, significant sales growth is expected in global emerging markets – 15 percent and 10 percent, respectively, for 2010 and 2011. The EMEA (Europe, Middle East and Africa) region is expected to lead the way – within EMEA, Turkey is seen as the star with nearly 30 percent sales growth this year and 17 percent in 2011.

Other emerging market standouts in expected sales growth: Taiwan (28 percent), Russia (15.8 percent) and India (15 percent). At 5.5 percent growth, the Philippines is expected to be the laggard.

Sales growth and margin expansion drive earnings growth – UBS predicts a 34 percent jump in earnings for emerging-market equities this year and another 12 percent in 2011.